The penny has not yet dropped in Leinster House. Perhaps not even fully in the wider Government. The money the Government will have available to spend on budget day on spending increases and tax cuts is a good deal less than the headline figures included in the new Department of Finance forecasts announced this week. The reason for this is that the Government has agreed — as part of legislation currently going through the Dáil — to set €6 billion aside next year to put into two savings funds for the future.
So, the real room for manoeuvre will be a good deal less than the almost €10 billion flagged in the document as the forecast 2025 surplus. It will not just be a question of subtracting the €6 billion going into the funds and ending up with €4 billion. There will be some other pluses and minuses. And no doubt some cash can be “found” behind the official sofa. But don’t hold your breath for a bonanza of pre-election giveaways.
Because of the way the official figures are presented, the full impact of the creation of the two funds is not immediately evident when you look at the forecast for the budget surpluses over the coming years. There is €38 billion in accumulated budget surpluses predicted over the next four years, using the EU borrowing measure. But if you assume that €6 billion-plus of this each year is sent towards the two funds (it may be a bit less in the later years because one of the funds can start to be drawn down in 2026) then more than half of this leeway is “off the table” in terms of putting it towards higher spending or lower taxes.
The top-line figure in the forecasts is a general Government surplus of €9.7bn for 2025, before allowance is made for anything that happens in the budget
The Stability Programme Update, written by the Department of Finance, is quite clear on this when, referring to the money going into the funds, it says that “the resources are not available to finance increased expenditure or reductions in taxes”.
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Politicians may take a different view, arguing that the “real” room for leeway is in fact increased by the fact that all this money is being saved. And there may be some wriggle room — for example, the figures count €4.5 billion in contingency funds, some of which might be redirected. And also allows for €5 billion in additional cash going into the social insurance fund, some of which will presumably be used to hike welfare payments. But expectations of a budget on the scale of those seen over the past few years will not be met.
The top-line figure in the forecasts is a general Government surplus of €9.7 billion for 2025, before allowance is made for anything that happens in the budget. This would generally be the pot to fight over for the budget, with a row between what goes into spending, what goes into tax cuts and how much is left as a surplus for the year. However, out of this now has to come the €6 billion for the two funds, just over €4 billion into the longer-term Future Ireland fund and €2 billion into the Infrastructure, Climate and Nature fund.
This is designed to put what may be volatile corporate tax receipts away for future use, rather than base current spending plans on them.
There is an ‘out’ to reduce or halt contributions in the event of an economic downturn. And the smaller fund, the Infrastructure, Climate and Nature resource, can start to pay out to some extent from 2026 onwards
This does not show up as a minus in the headline surplus drawn up under EU rules, as it is taken out of one pocket of the State and put into another. However, the pocket into which it is put involves what will be a legal commitment to put the money into the funds and leave them there for a prescribed period — assuming the legislation passes.
There is an “out” to reduce or halt contributions in the event of an economic downturn. And the smaller fund, the Infrastructure, Climate and Nature resource, can start to pay out to some extent from 2026 onwards to support climate investment. In future, of course, new legislation can always change the game.
But in terms of Budget 2025 to be delivered this October, this is a real constraint on what can be done. It reduces the room for manoeuvre, meaning that the budget will feel more like one of the pre-Covid ones and not like the mega packages introduced during Covid-19 and the cost-of-living crisis.
The position is still relatively strong — there is allowance already made in the figures for a close to 5 per cent increase in spending next year and this will rise on budget day itself with additional welfare and pension payments. There will be cash to widen tax bands, adjust tax credits and perhaps trim the USC. But much of this will be needed just to adjust for inflation and so will not give much of a boost to people’s living standards.
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The Department of Finance calculates that it would take €1.2 billion to index the system of income taxes for inflation — in other words to ensure that people do not pay a higher proportion in tax due to wage increases. Another chunk will be required to compensate those on welfare and pensions for rising prices — or likely offer increases a bit ahead of inflation.
After this, there will likely be some cash left over for pre-election targets — childcare spending, for example, or an extension of cuts to public transport fees.
But there will not be room for a repeat of the “once-off” measures we saw in last year’s budget, which included universal energy credits, a double child benefit week and various once-off welfare supports.
These household supports cost €2 billion, with the energy credits alone costing not far off €1 billion. The energy credits delivered €450 to households in bill savings. With energy prices on the decline and real living standards recovering, there seems no justification to repeat these general credits on economic terms. But in political terms, the Government will fear that not doing so will lead to a lower cash boost for households than was given by the last few budgets.
The now-traditional overspending on health and other pressures evident in the first quarter is, the department warns, one factor likely to actually reduce room for manoeuvre further
Finding a way to repeat the experience of recent years will involve finding room for manoeuvre via tax increases or spending reductions elsewhere — not impossible, but far from easy. Or a decision to loosen policy on the public finances from its current stated goals (already a rule to keep spending growth to 5 per cent is being exceeded). Or yet another bumper outperformance by corporation tax, which Minister for Finance Michael McGrath says is unlikely and has not been indicated by figures in the first quarter as being likely.
And remember on the other side of the equation, the now-traditional overspending on health and other pressures evident in the first quarter is, the department warns, one factor likely to actually reduce room for manoeuvre further when framing next year’s package.
There will, no doubt, be some inventiveness employed. For example, the Government could decide to run down the expected surplus for this year by making some once-off payments in 2024, rather than the normal practice, which would involve waiting for the budget year itself for measures to be introduced. This happened in the 2024 budget, when some energy credits were paid out in 2023.
The next key document is the Summer Economic Statement, due in July, which will outline the scope for budget day measures
Money may be diverted from contingency funding set aside, though the experience of recent years suggests that this may be needed for, well, contingencies.
No doubt a plausible pre-election package can be put together. But the pre-budget sums are not anywhere like as flush as they look at first glance. When the Coalition backbenchers and spending Ministers start to realise this, the pre-budget fun will really kick off.
The next key document is the Summer Economic Statement, due in July, which will outline the scope for budget day measures. How this will be presented will be fascinating. Drawing it up could lead to significant tensions in Government. In the meantime, don’t book your 2025 holidays based on a big-budget giveaway.
